ITAD BIR Ruling No. 120-14

July 21, 2014 ITAD BIR RULING NO. 120-14 Article 10, Philippines-Japan tax treaty, as amended Toyota Motor Philippines Corporation Toyota Special Economic Zone Santa Rosa-Tagaytay Highway Santa Rosa City, Laguna Attention: Ms. Blesilda M. Rodriguez First Vice President Comptrollership Division Gentlemen : This refers to your tax treaty relief application filed on June 11, 2012, on behalf of Toyota Motor Corporation ("Toyota-Japan") , requesting confirmation that its dividend income from Toyota Motor Philippines Corporation ("Toyota-Ph") is subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the amended Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty, as amended"). It is represented that Toyota-Japan , with address at 1, Toyota-cho, Toyota City, Aichi 471-8571, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan within the meaning of the Philippines-Japan tax treaty, per Certificate of Residence issued by the Toyota Tax Office on April 19, 2012; that Toyota-Japan was issued a license to establish its representative office in the Philippines on June 1, 1984; that a Certificate of Cancellation of License of a Foreign corporation was filed and approved on July 9, 1990 as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated May 17, 2012; that Toyota-Ph , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Toyota Special Economic Zone, Santa Rosa-Tagaytay Highway, Santa Rosa City, Laguna. HCEISc It is further represented that on May 10, 2012, the Board of Directors of Toyota-Ph approved a resolution to declare cash dividends in the amount of Two Billion One Hundred Seventy-eight Million One Hundred Seventy Thousand Four Hundred Ninety-eight and 00/100 (Php2,178,170,498), equivalent to 140.6% of the outstanding capital stock of Toyota-Ph and to be distributed on June 2012 to the stockholders of record as of December 31, 2011; that the said dividends were remitted by Toyota-Ph to Toyota-Japan on June 20, 2012 per Certification issued by the Bank of the Philippine Islands on December 11, 2013; that as of December 31, 2011, Toyota-Japan owns 5,267,996 common shares in Toyota-Ph , representing 34% of the total subscribed shares in Toyota-Ph ; and that Toyota-Japan acquired the said shares in Toyota-Ph through purchase and stock dividends from 1988 to 2011. It is finally represented, based on the Sworn Statement by Toyota-Ph on May 21, 2012, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . dividends, rents, royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). EITcaH xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: "Article 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: CcHDSA a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. Considering that Toyota-Japan owns 34% shares in Toyota-Ph or more than 10% shareholding requirement of the total share issued by Toyota-Ph more than six (6) months immediately preceding the date of payment of cash dividend, the dividend paid by Toyota-Ph to Toyota-Japan is subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. aEIADT This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue